Mondelez 2012 Annual Report Download - page 67

Table of Contents
When we use derivatives, we are exposed to credit and market risks. Credit risk exists when a counterparty to a derivative contract
might fail to fulfill its performance obligations under the contract. We minimize our credit risk by entering into transactions with
counterparties with high quality, investment grade credit ratings, limiting the amount of exposure with each counterparty and
monitoring the financial condition of our counterparties. We also maintain a policy of requiring that all significant, non-exchange
traded derivative contracts with a duration of one year or longer are governed by an International Swaps and Derivatives
Association master agreement. Market risk exists when the value of a derivative or other financial instrument might be adversely
affected by changes in market conditions and foreign currency exchange rates, commodity prices, or interest rates. We manage
market risk by limiting the types of derivative instruments and derivative strategies we use and the degree of market risk that we
plan to hedge through the use of derivative instruments.
Commodity cash flow hedges – We are exposed to price risk related to forecasted purchases of certain commodities that we
primarily use as raw materials. We enter into commodity forward contracts primarily for wheat, soybean and vegetable oils, sugar
and other sweeteners and cocoa. Commodity forward contracts generally are not subject to the accounting requirements for
derivative instruments and hedging activities under the normal purchases exception. We also use commodity futures and options to
hedge the price of certain input costs, including wheat, soybean and vegetable oils, sugar and other sweeteners and cocoa. Some
of these derivative instruments are highly effective and qualify for hedge accounting treatment. We also sell commodity futures to
unprice future purchase commitments, and we occasionally use related futures to cross-hedge a commodity exposure. We are not
a party to leveraged derivatives and, by policy, do not use financial instruments for speculative purposes.
Foreign currency cash flow hedges – We use various financial instruments to mitigate our exposure to changes in exchange rates
from third-party and intercompany actual and forecasted transactions. These instruments may include foreign exchange forward
contracts, futures, options and swaps. Based on the size and location of our businesses, we use these instruments to hedge our
exposure to certain currencies, including the euro, pound sterling and Canadian dollar.
Interest rate cash flow and fair value hedges –
We manage interest rate volatility by modifying the pricing or maturity characteristics
of certain liabilities so that the net impact on interest expense is not, on a material basis, adversely affected by movements in
interest rates. As a result of interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value. We
expect the effect of this unrealized appreciation or depreciation to be substantially offset by our gains or losses on the derivative
instruments that are linked to these hedged liabilities. We use derivative instruments, including interest rate swaps that have indices
related to the pricing of specific liabilities as part of our interest rate risk management strategy. As a matter of policy, we do not use
highly leveraged derivative instruments for interest rate risk management. We use interest rate swaps to economically convert a
portion of our fixed-rate debt into variable-rate debt. Under the interest rate swap contracts, we agree with other parties to
exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts, which is calculated based on
an agreed-upon notional amount. We also use interest rate swaps to hedge the variability of interest payment cash flows on a
portion of our future debt obligations. Substantially all of these derivative instruments are highly effective and qualify for hedge
accounting treatment.
Hedges of net investments in foreign operations – We have numerous investments in our foreign subsidiaries. The net assets of
these subsidiaries are exposed to volatility in foreign currency exchange rates. We use foreign currency denominated debt to
hedge our net investment in foreign operations against adverse movements in exchange rates. We designated our euro and pound
sterling denominated borrowings as a net investment hedge of a portion of our overall European operations. The gains and losses
on our net investment in these designated European operations are economically offset by losses and gains on our euro and pound
sterling denominated borrowings. The change in the debt’s value is recorded in the currency translation adjustment component of
accumulated other comprehensive earnings / (losses).
Income Taxes:
We recognize tax benefits in our financial statements when uncertain tax positions are assessed more likely than not to be
sustained upon audit. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement.
We recognize deferred tax assets for deductible temporary differences, operating loss carryforwards and tax credit carryforwards.
Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax
assets will not be realized.
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